Q&A: Would breaking up BP solve its Gulf of Mexico woes?

BP is back in focus after reports that the group is considering breaking up its business as it tries to rebuild itself in the wake of its Gulf of Mexico oil spill.

The Sunday Times said the board has been canvassing investors about a number of options including the sale of the group's refineries and petrol stations, scaling back its US operations and ramping-up in-house engineering instead of outsourcing.

Any such action would be on top of the planned sale of up to $10 billion worth of assets.

Why would BP want to restructure?

BP has been under the cosh ever since the explosion at its well in the Gulf of Mexico at the end of April which killed eleven workers. The company has decided to suspend dividend payments this year and sell assets to pay for a $20 billion compensation fund.

The US government is considering plans to stop BP drilling in the Gulf of Mexico for the next seven years amid claims the group took unacceptable risks and ignored warnings of problems on its rig.

The shares have lost ground and there are fears that it will be years before the company can pay dividends at the level that previously made BP a top pick for income investors.

For many, the dividend was the main reason for owning BP shares given the relatively low growth at the group.

The downstream business employs more than two thirds of all employees but accounts for only 3% of profits. A big institutional investor in BP is reported to have said transforming the business could lift growth from less than 2% per annum to 3-5% per annum. 

Can BP ever become a growth company again?

It would be very hard to do. Keith Morris, analyst at Evolution Securities, believes there are two key obstacles to such a radical restructuring: who would buy the assets and how BP could boost growth?

He said: 'If they thought they could get rid of them at a half decent price I’m sure that would be something they would look at very seriously.' However, BP is not the only company wanting to sell this kind of business and there are few companies prepared to buy them for 'serious money'.

Morris said BP would have to downsize materially to get to the position where it could really convince investors it was a serious growth story again. In the process the group could jeopardise its ability to win new licences if it shrank too far.

Would a new focus on growth make sense? Not really. Morris thinks the news story may be more about posturing from shareholders than any real conviction from the board, especially given there is still so much uncertainty around about how damaging the incident will be to BP's long-term prospects.